“A man earns profits only if he has, by superior foresight and judgment, uncovered a maladjustment—specifically an undervaluation of certain factors [of production] by the market.”

If I purchase a canvas, paint brushes, and oil paints, and labor to organize those paints on the canvas in so doing create a beautiful work of art that is auctioned at Sotheby’s for $1 million, did I earn a profit because I determined that the capital goods, the factors of production (paint, brushes, canvas) were undervalued?

No, I earned a profit by creating wealth; by organizing/changing the world around me into something more valuable. That is one source of profits earned by entrepreneurs.

The other source of profit is in trade. Each trade, if voluntary, makes both parties to the trade richer, according to his own assessment, he is better off. The item he receives is worth more than the item he trades away; and he has therefore made a profit.

The investment in capital equipment is not arbitrage, as Mises claims. The investment is either a voluntary trade, or the beginning of a creative (organizing) process. Does anyone imagine that Steve Jobs is wealthy because he identified undervalued computer chips and aluminum ore? No, Jobs creates wealth in the same way that a painter does — by organizing the world into something more valuable than its unassembled parts.

Profits are generated when an entrepreneur changes and organizes the world into something more valuable, and losses are generated when he changes the world into something that people value less than they did before. If he buys a forest for $10 million, harvests the trees and builds homes where they used to be, but is able to sell the homes for $5 million, his loss is endured only because he reduced the value of the forest in the eyes of the world.

Profits are generated when wealth is created, and losses occur when wealth is destroyed.

If you make decisions that are not designed to benefit other people and the “greater good” you’re a bad bad man… and rich people are immoral because they have not used their wealth to fight evil.

You’re evil unless you’re a selfless, reckless, ostentatious “superhero” who uses violent coercion… taking, stealing and destroying… to get what is “good and just.” You must judge all others and violently smite them if they do evil or disagree with your personal laws of justice.

If you are humble, peaceful, and cautious… and act to honestly provide for yourself and your family, without violence or coercion… if you trade and produce, and are tolerant of others with whom you may trade… you’re obviously an evil, evil man.

Statists think like violent comic-book vigilante heroes. The rest of us grew up a long time ago.

The people and government are always at odds with each other, and yet depend upon each other in order to make life better for everyone. A government's only income is taken from its people, and the people's only protection from war and invasion is provided by a centralized power. The only reason either can exist is by depending on the other.

Anarchists don't recognize the need for guardians (military, government), and communists don't recognize the need for merchants and private life. Socialists and libertarians fall somewhere in the middle, one desiring that centralized control be a large part of private life, and the other demanding that rulers stay as far from private life as possible. Almost everyone seems not to realize that the two will always be necessary, and somehow focus only on the faults of others' ideologies if taken to its logical extreme. Each faction is morally repulsed by the other, and I think that is because each abides by a different and opposite set of moral values. The morality of a merchant-trader is opposite the morality of a warrior, who views moral actions to include deference to authority, respect for hierarchy, honor, duty, and so on, and correctly views the use of a centralized, command and control organization as the best way to wage war.

A private citizen who engages in private production and trade holds a very different view of what is right and wrong. An honest businessman regards moral men as peaceful; he avoids violence and prefers to come to mutual agreements. He accepts outsiders and is tolerant of those different than him, he is honest in his business dealings, thrifty, efficient, creative. His morality is that of Ben Franklin, which in many ways is opposite the morality of a stereotypical warrior; a Samurai, for example. One welcomes violence, knows that deception and coercion are keys to success in battle, and defers to his superiors at all costs. The other shuns violence, knows that honesty is the foundation of success in business, and directs his own actions, considering other men his equals; none are entitled to dictate his actions.

Anarchists desire that all men live in peace by distributing power equally to all individuals, which will necessarily fail when men (peacefully) accumulate military power (perhaps also a religious following) and begin taking property by force from neighbors (who lack armies to defend themselves). A world without government control of territory is only possible if no man desires to take by force from another.

Libertarians recognize the need for rulers, but have a very specific and limited idea of their legitimate responsibilities and powers (generally military, police, courts). Libertarians regard government as a protector only of its citizens' freedom; their right to contract with each other as they see fit.

Communists believe that it is the duty of the ruler to both protect the people from violence, and also to direct the lives of individuals as if part of a military operation; something that never fails to enslave the people in the same way that a general commands and controls the actions of his troops.

I personally feel that the only necessary and legitimate role of government is in defense-based military functions. I feel that policing, laws and arbitration of disputes is easily handled by private merchants and privately-owned cities. The only thing that cannot be handled by individuals is their collective defense. Someone must be trusted with enough power to defend the nation.

I feel that rulers, in accepting the duty to defend, are trusted to avoid meddling in private affairs, to avoid abusing their great power by turning it against the people they have sworn to protect; a ruler's responsibility is only to defend against violent outsiders. Unfortunately, history has shown that the personalities of protectors and warriors are not often amenable to the idea that the most effective methods for protecting the innocent against an attacking army (with centralized control and physical force) are very different from the most effective methods for improving the lives of impoverished, sick, weak, elderly and disabled citizens.

A ruler's tendency is to use the same planning the coercion necessary for war in a futile effort to improve the lives of his people by force, forgetting that all of his weaponry and all of the comforts of life, all of the nation's medical technology and doctors' training, are provided by businessmen -- individuals engaged in private trade and production. A ruler and his army depend on the people they protect, and the merchants and producers dependent on the army just the same. It is and will be a necessary partnership until the day arrives when no man among us desires to coerce another by force. Until then we might pause to consider that the business of defense carries a different morality and methodology, and that its function is best kept separated from the morality and methodology of private life.

When the two join forces and borrow from each other we get corruption. A police officer, sworn to protect and defend innocent people, cannot be permitted to consider it moral to accept payments in exchange for the power he wields. A military leader cannot allow himself to be paid to wage war upon the request of the merchants who make the machinery of war. Similarly, private businessmen cannot permit themselves to engage in violence and coercion, cannot negotiate by force without devolving into gang-wars and mafia assassinations. Business people depend on honesty and trust; governments on violence and force. Each has its place, but trouble is always around the corner when those entrusted with power sell it to the highest bidder, or those trusted to avoid violence engage in physical coercion.

I read an article today in support of full government-audits of the Fed, as per the suggestions of various conservative and libertarian thinkers.

It's always amusing to see people who generally believe in "fighting for lower taxes, less government and freedom" make arguments in favor of more government intrusions into private business.

An audit of a private business is no more the answer to this problem than auditing the American Medical Association. The problem isn't that government isn't involved enough in the business of currency production; the problem is that they are already so involved that they gave them a monopoly in 1913.

Remove that monopoly! Don't improve it by making the Fed a true government capture. Does anyone really think it's best if the government itself runs the central bank?

Buffett has spoken in the past about the benefits of a death tax, and has said that he thinks the death tax should be 100%. It just so happens that a 100% death tax would be one of the most profitable changes in American law for Mr. Buffett.

Berkshire Hathaway owns owns six life insurance companies. Life insurance companies make a good portion of their income by helping wealthy people shelter their income from the death tax. They can do this because insurance payouts are not considered part of an estate and are paid tax-free to heirs. So Buffett's job is to accept a wealthy man's money and agree to pay it all back to his family upon his death, for a fee.

Buffett also profits from a high death tax by purchasing family businesses at fire-sale prices upon the death of the owner. If the family must pay a 55% death tax on the estate, based on the value of the business, they become desperate to sell (the taxes must be paid within one year of death) and Buffett is right there waiting.

So far he has purchased many companies because of the death tax, including: Star Furniture, Borsheim, Ben Bridge Jewelers, U.S. Liability, NetJets, R.C. Wiley, Flight Safety and Nebraska Furniture Mart.

So the bigger the death tax, the richer Buffett becomes; benefiting from the front end (before death) and the backend for those who fail to pay his companies the appropriate protection money. Either way, a rich business owner needs Mr. Buffett's help, and the bigger the death tax becomes, the easier it becomes for the Oracle of Omaha to rape and pillage the innocent families of dead men.

Perhaps we should take comfort in knowing that he isn't alone; life insurers spend about $10 million per month lobbying in favor of the death tax.

QUESTION: Do you think the economic organization we call capitalism is conducive to the human intuitions of fairness and reciprocity that you outline?

STEVEN PINKER: Probably not – these intuitions are probably tuned to face-to-face, tit-for-tat exchanges, not the complex web of highly indirect transactions that make up a market economy. People seem to have a sense, for example, that interest is inherently exploitative (since you don’t get anything tangible for the interest payments), as are markups by middlemen (since they seem to be parasites), even though economies cannot function without them. The result has been economically ruinous policies such as the prohibition of interest, and recurring episodes of discrimination, expulsion, and genocides against middleman minorities such as the overseas Chinese in Indonesia, the Indians in Africa, and the Jews in Europe. I suspect that you meant the question as an indictment of market economies, but my answer is an indictment of human intuition! I think people should all take economics courses to understand how economies really function and get over the simplistic intuitions that evolution gave us.

QUESTION: Do you think that within this economic system the tendency to dominate and exploit weaker peoples will always be a logical corollarly — “imperialism is the highest stage of capitalism” etc…

STEVEN PINKER: History shows us that the tendency to dominate and exploit is far greater with communism than with capitalism (at least the democratic capitalism of Europe and the US). The reason, I think, is that people only contribute altruistically to the good of others if they perceive them to be kin or close community. Otherwise you either have to motivate them by profit (capitalism) or by coercion (communism). As bad as the profit motive may seem, it’s much better than the Gulag, the killing fields, and the “cultural revolution.”